Why Bonds Still Make Sense in Retirement
Stocks may offer higher long-term returns, but later in life, your investing focus shifts from growth to preservation.

Much has been written about retirement planning and the right mix of stocks and bonds as you get older. Recently, a client forwarded a New York Times article to me that was written by David A. Levine, former Chief Economist at Sanford C. Bernstein & Co. The two-part article sought to challenge the longstanding advice that as investors get older they should reduce their exposure to stocks.
The author went as far as to suggest that investors of all ages should maintain a 100% allocation to stocks. His reasoning for this bold recommendation, although tough to follow, seems to be based on the idea that over a long enough time horizon the average performance of stocks will outperform the average performance of bonds. He also goes on to say that Warren Buffett suggests a 90% allocation to stocks.
The Fallacy of Averages
Whenever "investment experts" talk about averages, I am always reminded of the economics joke about putting your head in the freezer and your feet in a fire and coming out with an average body temperature. Averages can produce misleading and often deceptive data, particularly if you look at the simple arithmetic average. In your portfolio, that would be the total of your annual returns divided by the number of years being measured.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Let's look at an example: Suppose, in 2004, you were a 65-year-old new retiree with $100,000 in an individual retirement account. Your plan was to withdraw $4,000 per year to supplement your Social Security and other retirement income. In the four years preceding the Great Recession of 2008, Standard & Poor's 500-stock index returned 10.7%, 4.8%, 15.6% and 5.5% respectively. Then in 2008, the market dropped by 36.6%. The average performance over that five-year period was 0.02%. But by the end of 2008, your remaining IRA balance would have been just $74,268. And that does not include any fees, taxes or inflation during that period.
A skeptical reader might suggest that 2008's market decline was atypical. However, keep in mind that since 1928, the S&P 500 has declined 20 times by 20% or more. That's once every 4.4 years.
And in terms of Warren Buffett's advice, I refer you to this quote from him: "Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market."
Why the Longstanding Advice Makes Sense
In retirement, your portfolio management decisions require a mindset shift. The reason you reduce your allocation to stocks and increase your allocation to bonds is because capital preservation, more consistent performance (i.e., less volatility) and fewer significant drawdowns are more important objectives than growth.
Rather than trying to beat an index, we recommend that you target an after-tax performance range between the inflation rate on the low end and your withdrawal rate on the high end. This can help you maintain your purchasing power and preserve your principal balance whenever possible. Using the example above and an inflation rate of 2%, the target range would be between 2% and 4%. Even in this low-interest-rate environment, you can construct a relatively conservative, predominately fixed income portfolio to help meet that performance goal.
The Retirement Time Horizon
The clients we meet with have plenty of financial issues to consider without adding stock market volatility to their list. Retirees today are less likely to have pension income, are facing rising healthcare costs and are living longer than ever before.
To maintain the lifestyle that they have come to expect, retirees need a high degree of certainty built into their portfolios. With stocks trading at high valuation levels and interest rates at historic lows, we have shifted many of our clients away from equity and bond funds and into individual investment-grade corporate or municipal bonds. These bonds provide semi-annual interest payments and give clients the ability to hold their investments until maturity without having to worry about daily price fluctuations. To protect against rising interest rates and increases in inflation, we stagger the maturities of the bonds (bond laddering) so that proceeds from maturing bonds can be reinvested at the then higher interest rates.
When you are young and have years of compounding returns ahead of you, taking equity risk can make good sense. As you enter retirement, you simply cannot afford the risks of a 2008-like decline.
Note: The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.
This article is intended for informational/educational purposes only and should not be construed asinvestment advice, a solicitation, or a recommendation to buy or sell any security or investment product.Please contact your financial professional for more information specific to your situation.
Bryan Koslow, MBA, CFP®, CPA, PFS, CDFA™ is the President of Clarus Financial Inc., an Integrated Wealth Management firm with offices in NYC & NJ.
Securities and advisory services offered through Commonwealth Financial Network®, Memberwww.finra.org / www.sipc.org, a Registered Investment Adviser. Clarus Financial Inc., 120 Wood Ave South, Suite 600, Iselin, NJ 08830. 732-325-0456. Please review our Terms of Use.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Bryan is the Founder & President of Clarus Financial Inc., an Integrated Wealth Management firm with offices in New York City and New Jersey.
Bryan is a Certified Public Accountant (CPA), Certified Financial Planner™ (CFP®), a Personal Financial Specialist (PFS), and a Certified Divorce Financial Analyst (CDFA™). He holds FINRA securities registrations Series 7, 63, 65, and has his New Jersey Life and Health Insurance license.
-
The $33,000 Retirement: One Man's Surprising Path to Financial Freedom at 61
Forget what society tells you, even with less than $1 million, you can be happy in retirement.
-
The Best Aerospace and Defense ETFs to Buy
The best aerospace and defense ETFs can help investors capitalize on higher government defense spending or hedge against the potential of a large-scale conflict.
-
Roth IRA Conversions in the Summer? Why Now May Be the Sweet Spot
Converting now would enable you to spread a possible tax hit over more than one payment while reducing future taxes.
-
A Financial Expert's Three Steps to Becoming Debt-Free (Even in This Economy)
If debt has you spiraling, now is the time to take a few common-sense steps to help knock it down and get it under control.
-
I'm an Insurance Expert: This Is How Your Insurance Protects You While You're on Vacation
Here are three key things to consider about your insurance (auto, property and health) when traveling within the U.S., including coverage for rental cars, personal belongings and medical emergencies.
-
Investing Professionals Agree: Discipline Beats Drama Right Now
Big portfolio adjustments can do more harm than good. Financial experts suggest making thoughtful, strategic moves that fit your long-term goals.
-
'Doing Something' Because of Volatility Can Hurt You: Portfolio Manager Recommends Doing This Instead
Yes, it's hard, but if you tune out the siren song of high-flying sectors, resist acting on impulse and focus on your goals, you and your portfolio could be much better off.
-
Social Security's First Beneficiary Lived to Be 100: Will You?
Ida May Fuller, Social Security's first beneficiary, retired in 1939 and died in 1975. Today, we should all be planning for a retirement that's as long as Ida's.
-
An Investment Strategist Demystifies Direct Indexing: Is It for You?
You've heard of mutual funds and ETFs, but direct indexing may be a new concept ... one that could offer greater flexibility and possible tax savings.
-
Q2 2025 Post-Mortem: Rebound, Risks and Generational Shifts
As the third quarter gets underway, here are some takeaways from the market's second-quarter performance to consider as you make investment decisions.